We have a rescission violation in one of our officers gave the customer's proceeds before the 3 days was up. The customer did not rescind after the 3 days. What do I do now? I assume my rescission period is now 3 years. Anything else?

I recently had the same situtation. We knew the customer well, so we re-did correct RORs (even though that does not solve the problem) and explained their rights to them, including the right to rescind for up to three years from the date the loan was funded. I plan to inform the Board's audit committee of the risk and require additional training for all lenders within the next quarter.

I don't know if this was the right path to take - especially talking to the customer - but this is how I handled it.

“If the required notice and material disclosures are not delivered, the right to rescind shall expire three years after the occurrence giving rise to the right of rescission, or upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever occurs first.” [12 CFR 226.15] The violation you’re referring to is the failure to give the required notice. It appears that you gave them the required notice. A notice is a writing not a period of time. I also assume you did not have the debtor sign anything at the time of funding that would indicate a waver of rescission, which is another problem.

There is nothing in Reg Z that prohibits a lender from funding early; it is just not wise to do so. If they then rescind you lose your lien and note, but the debtor is required to give the principle back.

But if you did disburse the funds (which you should not do) prior to the three business days that is not a violation that will cause the rescission period to extend to three years. The three years goes into effect “if the required notice or material disclosures are not delivered .” As I stated earlier, the notice is not a time period. In 226.23(a)(2) it states “[n]otice is considered given when mailed, when filed for telegraphic transmission or, if sent by other means, when delivered to the creditor's designated place of business.” I don’t think that you “deliver” time.

It also provides in 226.23(d)(2) what will happen if the lender receives a notice of rescission. The lender must, within 20 calendar days after the receipt of a notice of rescission, “return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest.”

And in 226.23(d)(3) it states when the lender has complied with the above paragraph, “the consumer shall tender the money or property to the creditor or, where the latter would be impracticable or inequitable, tender its reasonable value.”

I still don’t see that, after delivering the proper notice of rescission, not giving them the three days to rescind (which you should do) will give them three years.

The rules a bank MUST follow are clearly explained in the regulation and commentary. Any other discussion telling a bank it is really okay to fund before 3 days is a defense for court, not a procedure for a lender or compliance officer. You would NEVER want a lender to hear a statement like that.

A bank will be cited with a violation in an exam if it does not provide the customer with 3 days minimum to rescind. Enough violations and the bank can have a serious situation on its hands.

From the commentary on closed end loans:

23(c) Delay of creditor's performance.

1. General rule. Until the rescission period has expired and the
creditor is reasonably satisfied that the consumer has not
rescinded, the creditor must not, either directly or through a
third party:

• Disburse loan proceeds to the consumer.

• Begin performing services for the consumer.

• Deliver materials to the consumer.

2. Escrow. The creditor may disburse loan proceeds during the
rescission period in a valid escrow arrangement. The creditor may
not, however, appoint the consumer as “trustee” or “escrow agent”
and distribute funds to the consumer in that capacity during the
delay period.

3. Actions during the delay period. Section 226.23(c) does not
prevent the creditor from taking other steps during the delay,
short of beginning actual performance. Unless otherwise
prohibited, such as by state law, the creditor may, for example:

• Prepare the loan check.

• Perfect the security interest.

• Prepare to discount or assign the contract to a third party.

• Accrue finance charges during the delay period.

4. Delay beyond rescission period. The creditor must wait until it
is reasonably satisfied that the consumer has not rescinded. For
example, the creditor may satisfy itself by doing one of the
following:

• Waiting a reasonable time after expiration of the rescission
period to allow for delivery of a mailed notice.

• Obtaining a written statement from the consumer that the right
has not been exercised.

When more than one consumer has the right to rescind, the creditor
cannot reasonably rely on the assurance of only one consumer,
because other consumers may exercise the right.

I agree, but my comment was about the three month or three year period and not what a bank should or should not do. Obviously a bank should wait the three days +++ as you indicated in you comment above.

I assume a three year right of rescission unless the lender has all three of the following:
Signed agreement (not, mortgage, etc.)
Given the right of rescission notice as that meets the

Did you know that you can rescind a rescission? But that is another topic.

As Kathleen stated, any violation, which includes disbursement will create the 3 year period to begin for rescission

“If the required notice and material disclosures are not delivered, the right to rescind shall expire 3 years after the occurrence giving rise to the right of rescission, or upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever occurs first.” [12CFR 226.15(a)(3)] and

“If the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation, upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever occurs first.” [12CFR 226.23(a)(3)]

I search all of PART 226--TRUTH IN LENDING (REGULATION Z) and only found the above two references to a 3 year right of rescission. Could you give me something else that would indicate that if the 3 days is violated that the debtor now has three years because that is not what these two references state?

I was under the impression until I saw Tom@BBCON's posting. Tom@BBCON does have a point. Since Jack Holzknescht has recently given a presentation on the Rescission Rules, can he clarify this?

Tom - so what your trying to say that if the creditor violates either and 226.15(c) or 226.23(c), it does not extend the rescission period for three years???

Randy, that is the way I read it.

I assume a three year right of rescission and then look for three things that could change it to three days. I call it the series of three.

1. Do they have signed agreements giving rise to the right of rescission (note, mortgage/trust deed/security agreement);

2. Did they give the debtor a proper form of notice (model form in Appendix H of Reg Z or one that is substantially similar); and

3. Did they provide the debtor with all other material disclosures.

It is when they have the last of these three things that the three days begin. Until that time they have three years. [list]

There are court cases that have ruled in favor of the borrower where they were given the proper form of notice, however the lender allowed them to sign the confirmation that they did not rescind. I'll have to go back and read the case, but if I recall correctly the money was not disbursed early but I'm not positive on that, and the courts ruled that by doing this that any reasonable person would think they no longer have the right to rescind, therefore the lender in effect allowed the borrower to waive their rescission right inappropriately. If money was disbursed to the borrower early, would not a reasonable person now think they have given up their right to rescind since they have received their proceeds? I'm no attorney, but I feel confident that I could win the borrower the right to rescind the loan in a court of law because of the money being disbursed in violation of 226.15 and .23(c).

Disbursing early may not automatically extend the right to rescind to 3 years, but I'm not convinced yet that it doesn't, but it sure will put your bank at great risk should the loan ever go into bankruptcy or foreclosure.

And whether or not is extends rescission, funding early is a violation of the statute and will earn the bank a criticism or worse, particularly is they do not have a firm process to prevent this occurring.

There was a class action case in Alabama where the lenders had their borrowers sign the confirmation before the end of the three-day period. But they considered that a waiver of the right to rescind, which you cannot do except in two situations. The bank lost $10,000,000.